A new bill that Democratic senators introduced Tuesday regarding multinational mergers shows what a profound disaster the global corporate tax system has become.

In apparent desperation, the group of 13 Democrats and one independent, led by Sen. Carl Levin (D-Mich.), are proposing legislation that would make it more difficult for U.S. firms to buy a smaller foreign company in order to incorporate in countries with lower taxes. The practice is known as tax inversion, and companies are using it aggressively to avoid paying the U.S. corporate tax rate of 35 percent.

The rush to incorporate abroad can be seen a simple cost-cutting measure, but it's also reflection of how just unlikely big companies think Congress is to pass any sort of tax reform. "I view tax inversions as motivated by existential tax despair," said Ed Kleinbard, a law professor at the University of Southern California.

The most recent corporation to attempt this maneuver was Pfizer, which tried (unsuccessfully) to buy AstraZeneca in order to become a British company, even though there didn't seem to be any good reason for a merger beyond avoiding the U.S. tax rate. (The British rate is scheduled to drop to a mere 20 percent.) A passel of other pharmaceutical companies, such as Endo International, have successfully relocated through tax inversions.

Levin's bill would require that foreign shareholders own 50 percent of the combined company's stock before it can reincorporate abroad through a merger -- the current threshold is 20 percent. The bill resembles an earlier proposal from the Obama administration, which expects that thwarting inversions would raise $17 billion over 10 years. The bill also follows an editorial by Sen. Ron Wyden (D-Ore.) earlier this month calling for a broadly similar change in policy.

Under the current system, the profits that U.S. firms make abroad they keep overseas to escape the U.S. rate. According to a report from Moody's cited by the Financial Times, firms have accumulated some $947 billion this way. The amount has increased rapidly in the past few years, partly as a result of the explosion of value in intellectual property. Because copyrights and patents have no physical location, pharmaceutical firms and technology companies have found it easy to shift their profits around the globe to find lower tax rates. Google has designated intellectual property as existing in Bermuda, allowing it to shift nearly $10 billion in annual revenue to an island nation with no corporate tax.

Yet while firms have much more money than they would if they'd been paying U.S. taxes all along, they can't really do much with it. They can't begin new, potentially profitable projects in the United States, which is what policymakers would like them to do, nor can they return the money to their shareholders, which is what Wall Street would like them to do. If they did, they'd get hit with a U.S. tax bill. They've been sitting on the money, hoping that Congress will eventually reform the tax system and reduce rates for U.S. corporations, or that legislators will grant another temporary holiday like the one in 2004 that allowed corporations to bring profits home free of tax.

The bill doesn't address any of these problems. Instead, it's designed as a temporary solution that would expire after two years, which the sponsors hope would be enough time for Congress to pass a comprehensive reform of the corporate tax system.

On the other hand, the fact that tax inversions have become a problem shows that corporate directors are even more pessimistic about the chances for reform. Pfizer and other companies are looking to make somewhat permanent changes to their structure by merging. The Silicon Valley company Applied Materials has also proposed to move abroad. Like Pfizer, the giant advertising firm Omnicom also tried and failed to merge with a British competitor.

Like everything else in Congress, Levin's measure appears unlikely to become law in the foreseeable future, but there is a small chance that it will discourage inversions anyway. Lawmakers might be able to convince U.S. firms that if Congress does get around to reforming the tax code, the new system will require taxes retroactively from firms that invert now, eliminating any advantages from mergers.

Wyden raised the possibility of retroactive legislation in his editorial, a tactic that Congress used when it tried to address the issue 10 years ago.

Max Ehrenfreund writes for Wonkblog and compiles Wonkbook, a daily policy newsletter. You can subscribe here. Before joining The Washington Post, Ehrenfreund wrote for the Washington Monthly and The Sacramento Bee.

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